The Impact of Interest Rates on Your Real Estate Investment!

2023 was the year of rate hikes, the Fed funds rate increased from 4.5% to 5.5% in 2023 via four different rate hikes that were all within the first 7 months of the year. For those who are new to financial jargon, the Fed Funds rate is the interest rate that banks charge each other to borrow money overnight. Therefore when the Fed funds rate increases, the amount that it costs the bank to service your loan also increases. To combat this, banks pass the added cost on to the consumer in the form of increased mortgage rates, increased credit card interest rates, etc.

Do you see how it works now? The FED increases or decreases the Fed Funds rate to control the money supply and available credit. In times of inflation, they increase the Fed Funds rate to restrict the money supply.

But what does this information mean for you as a homeowner or investor? It is no secret that purchasing real estate has become less affordable since mortgage interest rates have surpassed 7%. To minimize your interest costs, consider a higher down payment, the smaller the loan, the less you pay in interest. If you prefer a small down payment, start researching refinancing. Assuming you purchased a property with a 7% interest rate if rates ever drop below 5% refinancing might be a good option for you.

As an investor increasing interest rates equals increased due diligence! Make sure that you are taking the time to thoroughly underwrite deals. Make sure that the numbers make sense, and if they don’t; MOVE-ON! When evaluating rental properties add an extra buffer in your profit margins to account for vacancies and unexpected events. Be careful not to over-leverage if you are using equity to fuel other investments, and make sure that you clearly understand the terms of your loan. For fix & flip, investors add an extra 2-3 months to your projected debt costs and hold time, as rates increase things are taking longer to sell; you need to account for this!

From 2020-2022 the real estate investing community was spoiled! Investors could buy a property and even if they did not evaluate the financials properly the deal would still turn a profit and show equity growth. In today's environment, if you do not underwrite correctly you risk having all of your resources tied up in one property. In short, make sure that you are fully pre-qualified by a mortgage lender, that you understand the rental income/expenses, and that you can cover them. Gone are the days of buy now make it work later. Happy Hunting!!

-Cameron Gunnels